Morgan Stanley: Is Macau VIP Gaming Saturated?

By Shuli Ren

Analysts often blame Macau‘s VIP gaming slowdown on China’s cyclical macroeconomic headwinds, such as the GDP growth, the money supply (M2) growth and retail sales growth. But Morgan Stanley issued a report today, saying there are signs of structural saturation among the high-rollers in Macau.

Macau contributed 81% of all VIP roll in Asia, but other Asian markets may be taking away market share from Macau, because they offer junkets, who provide liquidity to the VIP rollers, better commissions. For instance, junkets receive 1.25% commission rate in Macau, but get 1.4% in Singapore and 1.4-1.5% in the Philippines.

Macau has also scared some VIP gamers away, “after a junket/agent, believed to owe HK$8-10bn, reportedly disappeared, and Sands China intensified the scrutiny after paying a small fine in one of the money laundry cases,” wrote analysts Praveen K Choudhary, Alex Poon and Thomas Allen.

To be sure, some of the VIP growth slowdown is a conscious decision by the companies. Since the beginning of last year, roughly 200 tables, or 9% of total VIP tables, have been shifted to serve mass market customers.

Morgan Stanley lowered their 2014 and 2015 forecasts today from 13% and 10% growth to 4% and 5% growth. UBS lowered theirs to 2% and 3%.

As analysts race to revise down their VIP growth forecasts, a valid question is: what happens if the VIP segment deteriorates further?

UBS conducted a stress test, looking at the potential downside to the Macau stocks if, say, the VIP volume declines with 20% next year. They found that, assuming an average 9x 2015 EBITDA multiple – which is 30% below the long-term average of 12.5 times – the impact is limited. Wynn Macau has the most to lose, with a potential 14% down to share price as of June 16. Galaxy Entertainment follows with 13% downside. Melco Crown and MGM China barely have any downside left.

On the upgrade and downgrade decisions today, Morgan Stanley has the following to say:

We upgrade MGM China to OW, as we see cheaper valuation, upside to consensus earnings estimates, high dividend yield and potential for significant upside from Cotai Phase 2.

We downgrade Melco Crown to EW, as we expect lower dividend yield, early losses from the Philippines and high valuation on a P/E basis to cap performance versus peers.

We downgrade Wynn Macau to UW despite its new management and superior product quality; we think the stock could underperform peers in the near term due to high
valuation, higher exposure to VIP segment, the impact of the smoking ban and inability to get credit for Phase 2 so early in the development cycle.

We maintain our OW ratings on Sands China, Galaxy and SJM. Sands China has the highest exposure to non-VIP business, Galaxy is the first operator to open the next phase of its casino, and SJM is the cheapest stock with a high dividend yield.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.